Under the Percentage-of-completion method of recognizing contract revenue, common methods of estimation of completion include all of the following except:
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A. B. C. D.C
This method attempts to match expenses with revenues and profits. Revenues recognized would not be based on the expected profits for the company during the year.
Under the Percentage-of-completion method of recognizing contract revenue, the company recognizes revenue and expenses based on the progress of the contract towards completion. This method requires estimating the degree of completion, which is typically done using various methods. The question asks for the method that is not commonly used for estimation of completion under the Percentage-of-completion method. Let's analyze each option:
A. Ratio of units completed to total units expected to be completed: This method compares the actual number of units completed to the estimated total number of units to be completed. It measures the physical completion of the project. For example, if a construction project involves building 100 units, and 60 units have been completed, the ratio of 60/100 (0.6 or 60%) indicates the progress of completion. This is a common method of estimating completion under the Percentage-of-completion method.
B. Ratio of costs incurred by expected total costs: This method compares the actual costs incurred on the project to the estimated total costs of the project. It measures the financial completion of the project. By comparing the ratio of costs incurred to the estimated total costs, the company can estimate the progress of completion. For example, if $50,000 has been spent on a project with an estimated total cost of $100,000, the ratio of 50,000/100,000 (0.5 or 50%) indicates the progress of completion. This is a common method of estimating completion under the Percentage-of-completion method.
C. Ratio of profits of the company year to date to expected profits for the year of the company: This method compares the profits earned by the company year-to-date to the expected profits for the entire year. While profitability is an important aspect of assessing the performance of a company, it is not directly related to estimating the completion of a contract. The Percentage-of-completion method focuses on the physical and financial completion of the contract, not on the profitability of the company. Therefore, this method is not commonly used for estimating completion under the Percentage-of-completion method.
D. Ratio of units delivered to total units expected to be delivered: This method compares the actual number of units delivered to the estimated total number of units to be delivered. It measures the progress of the project based on the delivery of completed units. For example, if a company has delivered 40 units out of an estimated total of 100 units, the ratio of 40/100 (0.4 or 40%) indicates the progress of completion. This is also a common method of estimating completion under the Percentage-of-completion method.
Therefore, the correct answer is:
C. Ratio of profits of the company year to date to expected profits for the year of the company.
This method is not commonly used for estimating completion under the Percentage-of-completion method.